Chinese Economists Disagree With Xi Jinping. But Xi Is Right.

For quite some time readers have been fed a steady diet of commentary signaling economic decline in China. To use but one example, Washington Post columnist Catherine Rampell recently wrote that the Chinese economy has hit a “rough patch.” Rampell is not alone. Around the time of her column, the Post gathered together a number of contributors to muse about the why behind China’s economic difficulties.

Is it struggling? As this column always sheepishly admits, it would be very difficult to measure the “GDP” of one’s street, let alone a vast country. Furthermore, economies are not blobs that can have their temperature taken, they’re people. The speculation here is that measures of Chinese economic health are as misleading as they are stateside. The economies of both the U.S. and China are far too dynamic to be tracked by the kind of stuffed-with-conceit people who would presume to measure them.

At the same time it’s notable that U.S. equity indices haven’t corrected in any substantial way. Non sequitur? Not at all. China is a huge market for U.S. corporations. Readers have seen this recently with Apple’s
AAPL
$200 billion market cap loss that took place after Chinese officials threatened merely limited bans on the sale of iPhones. Apple sells lots of iPhones there, only for investors to express nervousness. Apple is not alone. If China’s economy weakens, we will see it very clearly through equity weakness in the U.S.

Which raises an obvious question: if China’s economy is so weak, why isn’t the latter showing up in market indices? Why indeed. Maybe the answer can be found in Xi Jinping, the very individual so many U.S. pundits point to as the source of China’s alleged economic malaise.

According to a recent report in the Wall Street Journal, Xi’s substantial power “is delaying the country’s response to its worst economic slowdown in years.” While “Officials in charge of day-to-day economic affairs have been holding increasingly urgent meetings in recent months to discuss ways to address the deteriorating outlook,” Xi has apparently been content to do nothing. In the words of Journal reporters Lingling Wei and Stella Yifan Xie, Xi “hasn’t seemed interested in backing more stimulus” despite “advice from leading Chinese economists to take bolder action.” Xi is the wise one.

Better yet, if Benjamin Anderson were around he would cheer Xi’s lack of activity. In his brilliant book on the 1930s, Economics and the Public Welfare, Anderson was clear that the “Great Depression” was only “Great” because in response to a weak economy, the political class arrogated to themselves the power to fix it. There was your depression.

Lost on economists and politicians in the U.S. then, and in China now, is that a “recession” is a sign of an economy in recovery as bad investments are mothballed, poorly situated employees are shed so that they can find work better suited to them elsewhere, and it’s broadly when mistakes are rapidly corrected. To fight “recession” is to fight recovery. Rather than let individuals and companies fix themselves, “stimulus” makes it possible for bad ideas to fester. Absent “do something” politicians in the 1930s, there is no Great Depression. There’s just a boom, much as there was when President Harding did less than nothing in response to the much bigger 1920-21 recession. Do nothing authored the Roaring 20s. Get it?

In doing nothing now, Xi is ideally making it possible for the Chinese to fix their errors, and for well-run businesses to acquire physical and human capital on the relative cheap. It all speaks to the possibility that Xi knows much more than economists do about why economies grow. So do stock markets, by the way.